February saw a second consecutive monthly gain for equity markets to start the year, as stock prices continued to claw back losses from the fourth quarter of 2018. US markets rose +3.5% this month, marking a +12.4% gain year-to-date per the Russell 3000 index. Meanwhile, overseas markets advanced +2.0% in February and are up +9.7% YTD as measured by the MSCI ACWI ex-US index. Good news out of China has boosted global equity markets, with optimism around an imminent US trade deal and pro-growth policies set to support a 6% to 6.5% annual growth target pushing the MSCI China index up +14.9% YTD.
Bond markets remained largely flat on the month, as interest rates were generally unchanged with the Fed having paused its current pace of rate hikes in order to digest the uncertain global economic landscape. Gold prices declined slightly in February, while oil prices increased by +5.8% for a gain of +24.8% YTD on the S&P GSCI Crude Oil index. A balanced portfolio, made up of 60% in global equities and 40% in fixed income, would have gained +1.8% in February for a +7.2% gain YTD.
How then should we interpret the market’s strong start to 2019? As an indication that the 2018 year-end selloff was merely a blip in a continued path to higher prices, or perhaps as a warning sign that investors have gotten ahead of themselves and another leg downward is imminent? While either interpretation may be equally plausible, Archetype’s Three Dials approach helps us to distill the relevant datapoints into one coherent investment outlook. Below is the monthly update on each of our three primary indicators:
1. Economic Fundamentals: Positive
The first look at Q4 US GDP growth came in at a +2.6% annualized rate, outpacing consensus estimates and indicating that, while weakness exists in certain parts of the global economy, economic growth remains on track for the time being.
2. Market Sentiment and Momentum: Negative
Despite a strong first two months of 2019, markets have yet to regain their previous highs and recover key technical support levels. We continue to monitor the direction of the next move for equities, but for now our Sentiment and Momentum Dial remains in a bearish position.
3. Valuation: Negative
We monitor several indicators of long-term stock market value, many of which suggest that equities are richly priced at current valuations. For instance, Tobin’s Q, a metric that compares equity market values to their replacement costs, currently sits well above its long-term average, logging the second highest reading for US equities dating back to 1950. We continue to view valuations as unattractive at current levels.
On a composite basis, our “Three Dials” paint a slightly cautious picture of the investment landscape as we await clarity on key datapoints in the coming weeks.
Sources:
https://www.bloomberg.com/news/articles/2019-02-28/u-s-said-to-ready-final-china-trade-deal-as-hawks-urge-caution?srnd=premium
https://www.marketwatch.com/story/china-sets-economic-growth-target-vows-foreign-companies-will-get-equal-treatment-2019-03-04
https://www.nytimes.com/2019/02/20/business/economy/fed-interest-rates-minutes.html
https://www.bloomberg.com/news/articles/2019-02-28/u-s-gdp-grows-above-forecast-2-6-as-business-spending-picks-up
https://www.gurufocus.com/economic_indicators/99/tobin-q